Basics of Health Care Reform

1. Basics of Health Care Reform • Introduction (IF) • Plan Requirements • Grandfathered Plans and Non-Discrimination • New Taxes and Credits • Employer Mandate • Employer Mandate – Penalties • State Health Care Exchanges • Individual Mandate • Premium Tax Credit • Other Provisions

2. Introduction • IF you are an employer with less than 50 employees: • You do not have a requirement to provide heath insurance to your employees. • You are not subject to penalties if you do not provide insurance to your employees. • BE CAREFUL of new anti-discrimination rules.

3. Introduction • IF you are an employer with 50 or more employees: • You do not have to provide your employees with health insurance, BUT • If you don’t, you are subject to substantial penalties. • BE CAREFUL of new anti-discrimination rules.

4. Introduction • IF you are an employer with 100 or fewer employees, you can purchase your health insurance through a State Health Insurance Exchange.

5. Introduction • IF you are an individual: • You must obtain health care coverage for you and your dependents. • If you do not obtain coverage, you are subject to a penalty. • If desired, you will be able to obtain coverage through a State Health Care Exchange.

6. Plan Requirements • All Health Plans, including grandfathered plans, must meet the following requirement for plan years beginning after September 23, 2010: • No limits on lifetime and annual benefits (some very large annual limits are allowed for 2010-2014). • Cannot rescind an individual’s participation in the plan except for fraud or intentional misrepresentation. • Children who are not otherwise covered, can be covered up to age 26 on the parent’s policy (family coverage), even if the child no longer qualifies as a dependent under the tax code. • Preexisting condition exclusions are not allowed for covered individuals younger than age 19.

7. Grandfathered Plans and Non-Discrimination • President Obama promised that individuals could keep their current coverage. Thus, grandfathered plans are allowed. • Grandfathered status is determined at the employer level, not employee level. Plans that were in existence on March 23, 2010 are grandfathered. • Grandfathered plans are not covered by new discrimination rules, thus they can continue to favor highly compensated employees. • There are many rules that make it very difficult to retain grandfathered status. • Self-insured plans cannot be grandfathered.

8. Grandfathered Plans and Non-Discrimination • Penalties are significant: • $100 per day, per affected participant. • Tax is considered an excise tax and is non-deductible. • “Affected Participants” = employees who are not highly compensated (top 25% of compensation). • “SIMPLE Cafeteria Plan” can be established to help small employers (100 or fewer employees) meet non-discrimination rules. • Requires employer contribution to the plan.

9. Grandfathered Plans and Non-Discrimination • Regulatory guidance has not been finalized. • If your plan is discriminatory, and has changed enough that it is not grandfathered, you will need to make sure your plan is non-discriminatory or face large penalties.

10. New Taxes and Credits • Tax on unearned income: • Takes effect in 2013 • 3.8% tax on the lesser of: • Net investment income (net investment income = interest, dividends, royalties, rents, gains from property used in a passive activity, etc.) • The excess of modified adjusted gross income (AGI) over a threshold amount: • $200,000 for single individuals and head of household • $250,000 for joint filers • $125,000 for married filing separately

11. New Taxes and Credits

12. New Taxes and Credits • Additional Hospital Insurance Tax on Earned Income. • Takes effect in 2013. • 0.9% tax applies to wages and self-employment income that exceeds a threshold: • $200,000 for individuals • $250,000 for joint filers (imposed on combined wages) • $125,000 for married filing separate.

13. New Taxes and Credits

14. New Taxes and Credits

15. New Taxes and Credits • Current Medicare tax on earned income = 1.45% • Current employer matching tax on earned income = 1.45%. • Total current Medicare tax = 2.9% • Additional hospital tax = .9% • Total of above = 3.8% • Thus, earned income is being taxed at same rate as investment income. • S-Corporation earnings not taxed in either case at present time.

16. New Taxes and Credits • Small Employer Credit • Temporary tax credit for small employers: • Maximum credit = 10 or fewer employees and average annual wages of $25,000 or less. • Credit phases out as number of employees rises to 25 and annual average wages increases to $50,000. • Employer must pay 50% or more of health insurance premiums for its employees to qualify for the credit. • Credit is 35% through 2013. • Credit increases to 50% in 2014 and 2015, however, insurance can only be purchased from a state exchange in those years. • Non-taxable entities are also eligible for the credit.

17. Employer Mandate • “Applicable Large Employer” (50 or more employees or FTE’s). • Penalty will be assessed on applicable large employers if the employer does not OFFER its full time employees an employer-sponsored plan that provides “minimum essential coverage”. • Companies under common control are considered to be one employer.

18. Employer Mandate • Applicable Large Employer is based on the number of full time employees, defined as: • Any employee who averages at least 30 Hrs. per week. • An employee who works 130 hours per month. • Seasonal employees (who work up to 120 days) can be excluded. • Part time employees are counted; All hours worked by part-time employees that month divided by 120 = FTE.

19. Employer Mandate • The above formula is used to determine if a business is a small employer only. • The law does not require employers to offer health care coverage to their part-time employees or to pay penalties on their part-time employees.

20. Employer Mandate • Employers must offer coverage to dependents as well as full-time employees. • Dependents can include not only children and spouses, but parents and other relatives who live in the same house. • This will drive up costs. • Will some employers stop offering insurance and pay the penalty? • If an employer ceases coverage for its employees, it must cease coverage for owners, otherwise the $100 per day discrimination penalty applies.

21. Employer Mandate • Minimum Essential Coverage • Very broad definition. • If an employer is offering major medical coverage to its employees, it is probably providing minimum essential coverage.

22. Employer Mandate - Penalties • Employer with 50 or more employees will owe a penalty if it does not offer its employees (and their dependents) an employer sponsored plan that provides minimum essential coverage. • Penalty applies for any month in which one or more full time employees has enrolled in a qualified health plan through a state exchange, and the employee qualifies for a premium tax credit or cost-sharing reduction. • The credit or reduction is generally available to lower and middle-income employees that are not offered affordable minimum essential coverage.

23. Employer Mandate - Penalties • Penalty is $2,000 per year per employee, but is imposed per month. • $2,000 x 1/12th = 166.67 per month, times the number of full-time employees per month. • The number of full time employees is reduced by 30 when calculating the penalty. • The “penalty” is non-deductible for tax purposes.

24. Employer Mandate - Penalties • Example: • In 2014, Acme Corp. fails to offer minimum essential coverage. Ten of its employees receive a premium tax credit for enrolling in a health plan offered by a state exchange. Acme has 90 full time employees. Therefore it owes $166.67 x 60 employees = $10,000 per month or $120,000 per year.

25. Employer Mandate - Penalties • Alternative Penalty: • $3,000 annual ($250 per month) penalty on an employer that offers minimum essential coverage to its full-time employees, if any employee with household income below 400 percent of the federal poverty level instead chooses to obtain insurance through a state-established exchange. • Penalty is paid based on the actual number of employees who purchase insurance through the exchange. • Payment is non-deductible. • Penalty amount cannot exceed the $2,000 per employee penalty for a failure to offer coverage.

26. Employer Mandate - Penalties • The $3,000 penalty applies for each employee who purchases coverage through an exchange and receives a credit, if the employer sponsored coverage is “unaffordable”. • Unaffordable is defined as premiums costing more than 9.5% of the employee’s household income, or if the share of benefits paid by the plan is less than 60%.

27. Employer Mandate - Penalties • Example: • In 2014, Acme Corp. offers coverage to its 100 full-time employees. 10 employees enroll in a plan through a state exchange and receive a tax credit. • Acme owes $250/month x 10 employees = $2,500 per month, or $30,000 per year. • Acme’s penalty is capped at $140,000 per year (100 – 30 = 70 x $2,000 = $140,000).

28. Employer Mandate - Penalties • Open Questions: • Will a large employer be subject to the “all-employee” penalty, even if the employer fails to provide coverage to only one of its full-time employees or their dependents? IRS indicates the penalty will not apply if “substantially all” employees are covered, but has not defined “substantially all”. • Will employers be subject to a $40,000 penalty just because they hire a 50th employee? (50-30=20 x $2,000 = $40,000). • What if the employer has 49 employees, but is deemed to have misclassified a person as an independent contractor?

29. State Health Care Exchanges • Individuals and small groups (100 or fewer employees) may be able to purchase health plans through State exchanges. • A health exchange is an insurance marketplace where individuals and small businesses can buy health benefit plans.

30. State Health Care Exchanges • Must be established in each state by 2014. • States must make qualified health plans available to qualified individuals and qualified employers (those having 100 or fewer employees). • An exchange plan must offer an essential health benefits package that includes specific categories of benefits, meets certain cost sharing standards and provides certain levels of coverage.

31. State Health Care Exchanges • 4 Levels of “Essential Benefits Coverage” will be available: • Bronze: Benefits that are actuarially equivalent to 60% of the full actuarial value of the benefits provided under the plan. • Silver: 70% • Gold: 80% • Platinum: 90%

32. State Health Care Exchanges • Exchanges must: • Provide standardized comparative information on health plans. • Assign a rating to each qualified plan offered by the exchange. • Provide IRS with name and SS number of each individual who was an employee but was determined to be eligible for the premium assistance tax credit. • Provide employers with the names of its employees who ceased coverage under a qualified health plan.

33. Individual Mandate • Effective in 2014. • Penalty imposed on individuals who fail to obtain minimum essential health coverage for themselves and their dependents. • 2014: Greater of $95 or 1% of income. • 2015: Greater of $325 or 2% of income. • 2016: Greater of $695 or 2.5% of income. • After 2016: $695 adjusted for inflation.

34. Individual Mandate • Exemptions: • Individuals whose required contribution exceeds 8% of household income. • Individuals with incomes below the federal income tax filing thresholds. • Religious objections. • Undocumented Aliens • Individuals suffering hardship • Individuals enduring short lapses of coverage (3 months or less).

35. Individual Mandate • Collection of penalties: • The penalty is included with the individual’s income tax. • The IRS cannot use liens or levy’s to collect any unpaid penalty. • Taxpayers are not subject to criminal prosecution or any additional penalty for failing to pay the penalty. • The IRS has conceded that the penalty will be difficult to collect. Perhaps the only collection method will be offsetting of a refund.

36. Premium Tax Credit • Beginning in 2014, taxpayers with household income between 100% and 400% of the federal poverty level (FPL) can qualify for a refundable health insurance premium credit. • Individual must enroll in a qualified health plan through an exchange. • Eligibility for the credit is also based on family size and filing status.

37. Premium Tax Credit • Major importance for employers because it is the triggering mechanism for the employer mandate penalty. • FPL is $22,350 for 2011 for a family of four. $22,350 x 400% = $89,400. • Credit is the lower of: • The amount paid by the taxpayer to the Exchange for coverage of self, spouse and dependents. • Difference between the premium for a benchmark plan (Silver) and the taxpayers expected contribution. • Expected contribution is a formula based on income.

38. Premium Tax Credit • Example: • Family of 4 has household income of $50,000 and purchases a benchmark plan for $9,000. • The expected family contribution = $3,570. • The premium tax credit = $5,430 (9,000 – 3,570).

39. Other Provisions • $2 per participant fee on health insurance (paid by the insurer). • Cap on employee contributions to a health spending account of $2,500. • New taxes on tanning services and medical devises. • Employers must report the cost of coverage provided. • Employers must provide employees a notice describing coverage options through the exchanges. • 40% excise tax imposed on insurance companies offering “Cadillac plans”. Cadillac plans = coverage that costs $10,200 or more ($27,500 for families). Costs will presumably be passed on to customers.

40. Conclusion • Health Care Law: • Far reaching and complex. • Creates tremendous uncertainty for many individuals, families, employees and employers. • The federal government will continue to issue guidance and respond to problems as they evolve. • Taxpayers, both employers and employees, need to understand their new rights and responsibilities so they can make appropriate decisions about health care coverage.